(a). Company A has 8 million shares in issue and Company B 10 million. On day 1 the marketvaluepershareis20forAand8forB.On day2,themanagementofA decides, at a private meeting, to make cash takeover bid for B at a price of 12 per share. The takeover will produce large operating savings with a value of 60 million. On day 6, A publiclyannouncesanunconditionaloffertopurchaseallsharesofBatapriceof 12.00persharewithsettlementonday20.Detailsofthelargesavingsarenot announced and are not public knowledge. On day 12, A announces details of the savings, which will be derived from the takeover.

Required:

Ignoring tax and the time-value of money between days 1 and 20, and assuming the details given are the only factors having an impact on the share prices of A and B, determine the day 2, day 6, and day 12 share prices of A and B if the market is:

1.Semi-strong form efficient, and

2.Strong form efficient

In each of the following circumstances:

(i)the purchase consideration is cash as specified above, and

(ii)the purchase consideration, decided upon on day 2, and publicly announced on day 6, is one newly issued share of A for each share of B.

(b). The Efficient Market Hypothesis states that "security prices fully reflect all available information" (Fama, 1991).

Required:

Criticallyevaluatethepreviousstatement,ensuringtheresponseissupportedwith relevant empirical evidence.

Inthissectionstudentsshoulddemonstrateanunderstandingandknowledgeofthe theoreticalaspectsthatunderpinthedifferingstrengthsofmarketefficiency.The discussion/evaluationshouldbesupportedwithrelevant,contemporary,academic research that has been undertaken within this field and should be referenced accordingly. Ensuretheresponsedoesnotbecomeoverlydescriptivewithinitsapproach,rather, attempt to incorporate a critical viewpoint throughout, allowing logical conclusions to be offered.